A. Valuation and Accounting
Under the first, formally labelled as “valuation and accounting”, the member spouse, while including the value of the pension rights in his or her net family property, retains exclusive rights to the pension and defrays the equalization obligation with cash or other property. This option has some significant advantages over other approaches. It provides the spouses with a “clean break”, which is generally desirable and particularly so where the marriage breakdown is accompanied by animosity; it also avoids the administrative burdens imposed on pension plan administrators by some of the other options (as to which, see below). Generally, however, valuation and accounting is feasible as a solution only if the member spouse has sufficient money or other liquid assets to come up with the necessary payment. It is likely not an option if most of the value of his or her net family property resides in rights under a pension plan, for while the FLA treats those rights as property, it is property that the member spouse usually has no ability to access prior to retirement—he or she may be “pension rich” but cash poor. The FLA does give a court the authority in cases of hardship to order that the equalization entitlement be paid in instalments over a period of not more than ten years or that all or part of the payment be delayed for such a period, but there are problems associated with such a course of action. It will not be a practical solution if the member spouse does not have an adequate income unburdened by other obligations (such as, for example, support), to make the payments; in any event, the other spouse may have concerns about the security of his or her entitlement to the instalment payments or deferred payment over such a lengthy period. Further, postponing the achievement of equalization in this way can hardly be said to provide a clean break.
Another problem with the valuation and accounting approach stems from the possibility of “double dipping”, wherein a non-member spouse who received an equalization payment as a result of the valuation of pension rights also looks to the pension in pay for support. The member spouse may feel that it is unfair for the non-member spouse to regard the pension on marriage breakdown as an asset whose value can be taken into account for equalization purposes and later to view that same pension as income that is available for support. In Boston v. Boston, the Supreme Court of Canada held that, as a general matter, double dipping was inappropriate and that only that part of the pension earned after separation should be taken into account in determining the member spouse’s support obligation. However, the Court also recognized exceptions to this principle, such as where a support order is rooted in need rather than compensation or where, despite the fact that the order is compensatory, the non-member spouse has made reasonable efforts to use his or her assets to produce income but still suffers from economic hardship as a result of the marriage breakdown. (Following the breakdown of a lengthy marriage, such grounds for spousal support are fairly common.)
B. The “If and When” Approach
Another option, involving what is commonly referred to as an “if and when” approach, defers satisfaction of the equalization requirement until the pension is actually in pay, utilizing a trust imposed through the vehicle of a domestic contract or court order. The trust may be imposed on the plan member, requiring him or her to pay part of each pension payment received over to the non-member spouse; alternatively, it may imposed directly on the plan administrator, who is obligated to divide the pension payments at source. The latter option avoids some of the drawbacks of the former, in that contact between the former spouses is not required and potential enforcement difficulties inherent in a trust that is personal to the member spouse are avoided. Unfortunately, however, there are numerous other problems attendant on both types of arrangement.
i. Inconsistency with the FLA?
To begin with, it is not clear that “if and when” orders in the form in which they are usually made are entirely in accord with the intention behind the FLA equalization provisions. The requirement to value net family property, including pension rights, suggests that where equalization is to be achieved based on a division of the value attributed to such rights, the division should be according to the ratio of the present value of the rights at separation to the present value of the rights at retirement; however, what many if not most “if and when” orders (and agreements, though they do not raise a problem of conflict with the FLA) actually do is to give the non-member spouse an entitlement based on the ratio of pensionable time while the marriage was ongoing to total pensionable time. One would infer that such orders and agreements are often being used to avoid, for both spouses, the risks associated with equalization valuations, which, as previously noted, employ numerous speculative assumptions about the future which virtually ensure that the present value attributed to the pension rights will significantly and perhaps even wildly overstate or understate their ultimate real value. However, the difference in results that arise from the application of time-based ratios and the application of present value-based ratios can be quite substantial, with the ratio of present values approach tending to yield a much lower entitlement. While the resulting smaller entitlement is, at least arguably, unfair to the non-member spouse, it does, presumably, reflect what the FLA intended, as otherwise the requirement to value rights under a pension plan as net family property would seem to serve no purpose. In Best v. Best, a majority of the Supreme Court of Canada, in discussing the many difficulties associated with “if and when” arrangements, appeared to allude to the possibility that they do not truly comport with the FLA, but ultimately refrained from making any ruling on that point.
ii. Non-member Will Have to Wait
Another, obvious, problem with an “if and when” approach is that the non-member spouse loses the benefit of immediate settlement of his or her equalization entitlement. The view that this is necessarily unfair to the non-member spouse is perhaps not compelling, given that the “property” that led to the equalization entitlement is itself not immediately accessible and given as well that the FLA contemplates the possibility that equalization payments could be postponed for or spread out over as many as ten years in any event. Undeniably, however, the non-member spouse is disadvantaged by the fact that control as to when the entitlement is satisfied is outside of his or her control, for the pension will become payable only when the member spouse elects to receive it; he or she may decide to retire at “normal retirement date”, but he or she might also decide to retire at an earlier or a later date. This may have an adverse impact on the income that is eventually received, and in any case it obviously can complicate financial planning for the non-member spouse.
iii. The “Fifty Per Cent” Rule
A further difficulty stems from section 51 of the PBA, which provides that no more than fifty per cent of pension benefits that accrued during marriage can be assigned under a domestic contract or court order. For purposes of this limitation, a regulation under the PBA essentially prescribes a strict termination method of valuation; this raises the possibility that a non-member spouse’s entitlement under an “if and when” agreement or order, at least where based on a time ratio, will exceed what can be paid out to him or her under the PBA. As a consequence, pension plan administrators upon whom a trust is imposed by such an agreement or order may find themselves unable fully to carry out the trust obligation, leaving the parties to determine how to satisfy the portion of the non-member spouse’s entitlement that exceeds the fifty per cent limit.
iv. Burden on Plan Administrators
This points to another problem with “if and when” arrangements; they not only have drawbacks for the parties, but they also impose burdens on those responsible for administering pension plans that are subject to such arrangements. Administrators are effectively required to calculate the value of the non-member spouse’s share in accordance with the PBA regulation to determine whether the agreement or order creates a conflict with the PBA and, if it does, to advise the parties that they are bound to refuse to divide the pension payment in full conformity with what was agreed to or ordered. Other problems faced by administrators include orders and agreements that are unclear or that fail to deal comprehensively with potential issues or that purport to divide benefits in a way that is not consistent with the provisions of the pension plan. Avoiding or correcting these problems is likely to involve interaction with the spouses or their counsel, forcing administrators to expend time and often to incur legal expenses. Further, some “if and when” orders and agreements provide the non-member spouse with a right to continued payments only until a certain aggregate limit is reached, which will necessitate the setting up of some sort of tracking mechanism that would otherwise not have been needed.
Other “If and When” Problems
There are several other potential difficulties that have been identified with respect to “if and when” agreements and orders. The non-member spouse’s entitlement to share in the pension payments will, of course, end when the member spouse dies; some suggest that if that occurs prior to retirement, the non-member spouse could be left with nothing. There is also the risk that other possible future occurrences, such as winding up of the plan due to failure on the part of the plan sponsor to meet funding requirements, could significantly reduce the amount of pension benefits that both parties had assumed would be available (though payments from the Pension Benefits Guarantee Fund could somewhat mitigate the loss). Finally, there could be taxation issues; if the payments made to the non-member spouse come directly from the member spouse, they will be made from after-tax dollars; while adjustments could be made to reflect this, if the member spouse’s marginal tax rate is higher than that of the non-member, the tax that is paid will be greater than if the payments made to the non-member came directly from the pension plan.
C. Lump Sum Transfer on Actual Termination
The only settlement option other than valuation and accounting and “if and when” arrangements that is currently available under Ontario law is one that can be accessed only where the employment of the member is terminated or the pension plan of which he or she is a member is wound up. Under section 42 of the PBA, the member can require the plan administrator to transfer an amount equal to the commuted value of the pension benefit out of the plan to the pension fund of another pension plan, to a locked-in retirement savings arrangement or to the vendor of a life annuity that will not commence payment prior to the earliest date on which the former member would have been entitled to receive pension benefits under the plan. Subsection 65(2) of the PBA voids any purported assignment of an interest in moneys thus to be transferred, but subsection 65(3) creates an exception where the assignment is pursuant to a domestic contract or court order under the FLA. While this allows for an immediate settlement, it availability is obviously quite limited, and it may in any case raise concerns for plan administrators.
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